Daniel Defoe wrote there is nothing “as certain as death and taxes” and doubtless he, like many others, would have been shocked by the insensitivity of a tax that is timed to coincide with life’s other certainty and for many seen as a tax on tax.

As Baby Boomer wealth, fuelled by ever-rising house prices continues to increase, more and more families are likely to be impacted by Inheritance Tax (IHT).

However, if you are one of those fortunate enough to believe you will have an Inheritance Tax liability on your estate, paying Inheritance Tax doesn’t have to be inevitable. One option of course is to spend more to reduce your liability, but for those who want to see their wealth support their family or charitable causes, this most emotive and unpopular of taxes can typically be minimised or mitigated altogether through the use of allowances or exemptions with careful and timely planning.

A tax on the combined value of all your property, possessions, investments, savings, cash and any other types of assets that fall within your estate, IHT is payable when those assets are transferred to members of your family or other beneficiaries on death, other than your husband, wife or civil partner. The standard threshold or Nil Rate Band for IHT, currently fixed until 2030, is £325,000, beyond which your estate will typically pay 40% IHT. This reduces to 36% if you give away at least 10% of your ‘net’ estate to charity.

The new Residence Nil Rate Band

A recent but complicated addition to the Nil Rate Band allowance is the introduction of the ‘Additional Threshold’, more commonly known as the Residence Nil Rate Band (RNRB) that applies if you pass on your family home (not a second home or buy-to-let property) to direct descendants. The RNRB was increased to £175,000 in April 2020 and again is currently fixed until 2030. The complication comes from two main areas: a cap of £2m of total assets, after which the allowance is tapered down by £1 for every £2 over the cap; and the definition of direct descendants. Some trusts work for this purpose and others do not, so it is worth reviewing your will, especially if it involves a trust and was written over two years ago, to ensure that you are making the most of these allowances.

Both the Nil Rate Band and the Residence Nil Rate Band can be transferred between married couples and civil partners when one person dies and this also applies to previous marriages or civil partnerships, although as this adds complexity it would be advisable to seek financial advice in this instance.

Gifts to family members or friends

Gifting is a relatively straightforward way to reduce IHT, but various gifts do have different Inheritance Tax treatments depending on the value of the gift, the timing and who the beneficiary is. Some gifts are free from IHT, notably gifts to your wife, husband or civil partner and gifts up to the value of your annual gifting allowance of £3,000. It is important to be aware that this does not mean £3,000 per person but in total and can be carried forward to the next year – but only for one year.

There are other allowances that can be used each tax year, such as wedding or civil ceremony gifts up to £1,000, rising to £2,500 for a grandchild or great-grandchild and £5,000 for your children when they get married or go into a civil partnership.

Other options include normal gifts out of income, provided you can demonstrate it will not impact your normal lifestyle. Payments to help with another’s living costs, such as a child under 18, and gifts to charities or political parties, are other exempted gifts for Inheritance Tax purposes.